• Banking System in India

    The Banking System in India consists of the following types of banks

    • Reserve Bank or Central Bank
    • Development Banks
    • Public Sector Bank.
    • Foreign Banks
    • Private Sector Banks
    • Cooperative Banks
    • Regional Rural Banks
    • Local Area Banks

    The Reserve Bank of India

    The Reserve Bank of India is the Central Bank of the Country and came into being by the Reserve Bank of India Act 1934. It was nationalized in 1948.

    Key functions of RBI

    • Acts as Central bank that regulates other banks in India
    • It issue domestic currency and  regulates there movement
    • The banker to the Government of India and the State governments.
    • It manages the public debt and has the obligation to transact the banking business of the Central Government.
    • It undertakes to accept money on behalf of the Government and make payment on its behalf.
    • Acts as the banker’s bank. Commercial banks maintain their current account with the Reserve Bank of India.
    • Manages the volume of credit created by the commercial banks to ensure price stability.
    • Manages the foreign exchange rate and intervenes whenever required
    • Devise all the monetary policy measures in order to control liquidity in the system
    • The lender of Last Resort. It will lend to banks in trouble.
    • It devises norms for External borrowing of the domestic companies.
    • It stores the forex reserves and gold for the Government and supports the importers with the foreign currency during crisis time.
    • Regulates all the NBFCs (Non-Banking Financial Corporations) and Co-operative banking institutions of a country.
    • As per ne Micro Finance Bill passed in 2012, RBI also regulates all the Microfinance institutions in India

    Development Banks

    These were set up to give long term finance for the development of the country. The main list of banks which were set up with the same purpose is provided below

    • Industrial Credit and Investment Corporation of India Ltd (ICICI)
    • The Industrial Finance Corporation of India (IFCI)
    • The Industrial Development Bank of India (IDBI)
    • The Industrial Reconstruction Bank of India (IRBI) and
    • The National Bank for Agriculture and Rural Development (NABARD)

    ICICI, by a reverse merger in 2002, became a normal commercial bank. IDBI was converted to a commercial bank in October 2004 and merged with IDBI Bank on March 31, 2005. It is expected that the other development banks, having outlived their utility would also be either converted to commercial banks or merged with commercial banks.

    Public Sector Banks

    These are banks in which Indian government owns the majority stake and has control over the management and activities. The largest is the State Bank of India which was formed by the merger of the Presidency Banks – the Bank of Bengal, the Bank of Bombay and the Bank of Madras in 1921. It was then known as the Imperial Bank. It was nationalized in 1955 by the passing of the State Bank of India Act, 1955.

    The other nationalized banks came into being on July 19, 1969 when  Mrs. Gandhi’s Government nationalized fourteen banks that had deposits of Rs. 50 crores or more. On April 15, 1980, six more banks having demand and time liabilities of not less than Rs.200 crores were nationalized. This was done to take banking to the villages and serve the developmental needs of all sectors of the economy.

    Foreign Banks

    These are branches of banks incorporated outside India. The larger ones that have been operating in India for many years are Standard Chartered Bank, Citibank, American Express Bank, ABN Amro, BNP Paribas and Hong Kong and Shanghai Banking Corporation.

    In March 2004 the RBI issued guidelines permitting NRIs and Foreign Institutional Investors investing in the banking sector. This permitted aggregate foreign investment from all sources up to a maximum of 74 percent of the paid up capital of the bank while the resident Indian holding of the capital was to be atleast 26 percent. It also provided that foreign banks could only operate through one of the following – branches. Wholly owned subsidiary or a subsidiary with an aggregate foreign investment of upto a maximum of 74 percent in a private bank.

    In the first phase foreign banks will be permitted to set up wholly owned subsidiary by conversion of existing branches into a wholly owned subsidiary. These must have a minimum capital of Rs. 300 crores and must ensure sound corporate governance. They will have flexibility to open more than 12 branches a year and branch expansion in areas with lower banking presence. Permission for acquisition of shareholding in Indian banks will be limited to banks identified by the RBI for restructuring.

    Private Sector Banks

    These are banks which are not government owned or controlled. Their shares are freely traded in the Stock Markets.

    These may be divided into:

    • Old Private Sector Banks such Federal Bank, Dhanalakshmi Bank, Catholic Syrian Bank
    • New Private Sector Banks like ICICI Bank, HDFC Bank, IDBI Bank, Axis Bank (Earlier known as UTI Bank), Kotak Mahindra Bank  and Yes Bank.

    Cooperative Banks

    Cooperative Banks are those that are created by a group of individuals to support either a community or a religious group. They operate in metropolitan, urban and semi urban centers to cater to the need s of small borrowers. These are controlled by the RBI and by State Cooperative Acts.

    Regional Rural Banks

    These came into being on October 2, 1975 when 5 regional rural banks were established under what became the Regional Rural Banks Act 1975.  These were to bridge the gap in rural credit granting loans and advances to small and marginal farmers, artisans, small entrepreneurs and persons of small means engaged in trade, commerce, industry or other productive activities within their area of operation.

    Local Area Banks

    Local Area Banks came into existence in 1999 and licences were given for these banks as it was felt that regular commercial banks were not financial the rural/ agricultural sector adequately. Licences were given to open branches in three districts. Branches in urban/ semi urban areas were granted only after ten branches were established in rural areas/ villages. Four licences were in total granted – two in Andhra, one in Punjab and one in  Gujarat. They were opened with an initial capital of Rs. 5 crores.

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